Traders, speculators and investors all over the world eagerly await the annual OPEC November press conference and meeting. Markets are already reacting in anticipation, with more inevitable movements on the horizon. However, will this year’s press conference and meeting hold as much influence over the markets as it has in the past?
The Big Announcement
OPEC had previously agreed to extended production cuts until March of 2018. However, there is a consensus that they will extend their cuts well beyond that target to the remainder of 2018. Anything different will come as a surprise to many, as many investors are speculating that announcement. If OPEC extends the cuts, then they present the opportunity for its members to be less compliant with the supply restrictions, which we have seen in the recent past. There is also speculation that OPEC wants to reset the crude oil price floor to above $60. This leads many experts to presume there will be a tug-of-war through 2018 between output compliance among OPEC members, and reaching or maintaining the $60 price point. Regardless of the outcome, this is all in the context of OPEC having less power and manipulation over the markets than in previous years.
Potential Market Influencers
While the upcoming OPEC meeting is the headlining factor expected to knock prices around, there are many other variables contributing to the rise in crude prices. As OPEC’s influence wanes, the demand for U.S. crude rises. This demand could help the OPEC countries achieve their desired higher price point, despite their weaker influence.
The transparency of oil storage is growing foggy, as supply is flowing in from areas that are not accustomed to being such large contributors to the world’s reservoir. The Energy Information Administration (EIA) storage levels indicates that supply gluts are well above last year’s numbers, but the recent drawdowns have taken their toll. Typically, hurricanes have an immediate impact on oil levels. However, this year’s response to the severe storms was delayed. Many of the large storage drawdowns were met with a selloff in crude, and vice versa. As traders diagnose the numbers and dissect the supply-cut timeline, we could still expect fundamentals to be in opposition to the price from time to time.
Another major influencer will be the global economy. Although we believe it is unlikely that oil will reach $100 in the near future, if we’re at the beginning of a growth period (as some economists predict), the price of oil will likely rise above $60 and stay above $50. This new level may be the inflationary price that we will have to accept.
A Lingering Influence
In early November of 2017, Saudi Arabia announced a number of firings of corrupt political officials, which immediately spurred a rally in crude. After three years of less-than-ideal oil prices, combined with a diminishing budget surplus, Saudi Arabia needs to spark economic growth and remove their dependence on oil. In order for Prince Salman to sell-off stake in the oil giant, Saudi Aramco, the price of crude will need to pass $60 per barrel, although at this time, many experts believe it might reach $70 per barrel. The sudden release of political officials pushes forward both agendas. (This is a primary reason why they are spearheading the production cuts among OPEC members).
Draining OPEC’s Power
The waning influence of OPEC is due to several, noticeable factors: there are more large players actively participating in the markets; weekly supply updates are more transparent and accessible; and their members are gaining a reputation for breaking the word of their agreements. These factors, when combined with Russia overtaking OPEC as the number one producer and the surprising surge in U.S. shale oil production are diminishing the power of the oil king’s word. While their influence is still impactful, it no longer has such a dominating say in the direction of the world oil markets.
The 2017 press conference and meeting should test the strength of OPEC’s words, as well as the world’s tolerance for oil prices. As the global community watches with anticipation, investors would be wise to prepare for the expected, and unexpected, market reactions. Working with a trusted advisor can help investors capitalize on opportunities while protecting from a potential downside.